Oil futures fall on Senate reserve move

Crude futures end the week down more than $1

SAN FRANCISCO (CBS.MW) -- Oil futures fell Friday to take their total loss for the week to more than $1 per barrel after the U.S. Senate moved to cancel a hefty delivery of crude oil to the nation's oil reserve.

The Senate approved a measure late Thursday to suspend deposits to the Strategic Petroleum Reserve and to instead sell the 53 million barrels of oil slated for delivery. The amendment to the 2005 budget resolution, which still has to be approved by the House and President Bush, was sponsored by Senators Carl Levin, D-Mich., and Susan Collins, R-Maine.

The sale of the oil would generate over $1.7 billion in additional revenue, while cancellation of the SPR deposits could cut gasoline prices by 10 cents to 25 cents per gallon, the Senators said.

On the New York Mercantile Exchange, crude for April delivery traded as low as $35.15 per barrel, its lowest intraday level since Feb. 26. It closed at $36.19, down 59 cents for the session, and down $1.07 for the week.

April unleaded gasoline fell by 2.3 cents to close at $1.0973 per gallon after climbing nearly 5 percent in the previous session. It's down 2.73 cents from the week-ago close. April heating oil ended at 87.89 cents per gallon, down 1.15 cents.

"The U.S. Senate acted to cancel the delivery of 53 million barrels of crude oil to the Strategic Petroleum Reserve," said Todd Hultman, president of Dailyfutures.com, a commodity research provider.

The move "makes good sense and is designed to make more crude oil available at a time when unleaded gasoline prices have been making new record highs," said Hultman.

"It does not solve the larger problem of supplying more oil to a growing world economy, but it should help to buy time and ease the strain of high prices," he said.

Money raised from the oil sales would go towards deficit reduction and homeland security costs. "At a time when oil prices are at near record highs and the Strategic Petroleum Reserve is already 92 percent at capacity, it makes good public policy sense to temporarily suspend SPR purchases and use these dollars for homeland security," said Sen. Collins.

Pricing pressure

Other fundamentals factors worked to pressure crude-oil prices Friday.

"Dollar strength was the catalyst that led to an avalanche of selling," said Michael Armbruster, an analyst at Altavest Worldwide Trading.

And though OPEC-member Venezuela has voiced threats to end exports to the U.S. if the U.S. interferes with its civil unrest, many energy traders don't believe the oil producer would risk losing its best customer. "This is also helping relieve the tension in the equity markets as an expensive gasoline market is perceived as taxing the economy," said John Person, head financial analyst at Infinity Brokerage Services.

Meanwhile, energy traders will be "closely following price action to attempt to measure what effect, if any, the Madrid bombings will have, especially now that it appears there might be an al-Qaida connection," said John Kilduff, an analyst at Fimat USA. Bombs exploded on four rush-hour trains Thursday, killing at least 198 people. Read more.

"After Sept. 11, prices initially spiked, but in the following days the market collapsed as the conclusion was made that fear would translate into a contraction of economic activity," Kilduff wrote.

But Phil Flynn, an analyst at Alaron Trading, says things are different this time around. "Al-Qaida hopes to inflict psychological damage to the world economies and the oil industry is a prime target," he said. "A terror premium is a fact of life in crude oil prices and could remain with us for the next weeks or months."

Output, demand and supply data

At the same time, the oil market digested an OPEC output survey released Friday by energy information provider Platts. The survey said OPEC production fell by 120,000 barrels per day to average 26.03 million barrels per day in February.

Despite what it called a "downward drift in output," Platts said the 10 OPEC-member nations, excluding Iraq, produced at a rate more than 1.5 million barrels per day above their current ceiling of 24.5 million barrels. A new production ceiling of 23.5 million barrel per day is scheduled to take effect at the beginning of April, Platts said.

Still, the reported fall in February output comes just a day after the International Energy Agency raised -- for a fifth-straight month -- its 2004 estimate of growth in global oil demand growth.

Specifically, the IEA raised its latest estimate by 220,000 barrels per day to 1.65 million barrels per day -- that would be the largest upward hike since 1997.

Most of the demand growth is expected to come from China. The IEA upped China's demand growth estimate for the year by 230,000 barrels to total 580,000 barrels per day.

"Growing energy demand resulting from the global economic recovery has been pushing up oil prices," said Kilduff.

However, "there are signs, like the lack of job growth in the U.S. ... that expose the weak foundation of the current recovery," he said.

Still, many analysts are betting that oil prices will rise after a near-term decline. "Crude prices may fall $2 to $3 in the next few days, but remain well supported," said Dailyfutures.com's Hultman.

And Altavest's Armbruster said "once the selling abates, look for a rebound next week."

Gasoline takes the lead

Gasoline supplies and prices remained a key concern for the energy market with summer still months away.

U.S. gasoline supplies for the week ended March 5 fell by 1.6 million barrels to stand at 200.4 million barrels, according to Energy Department data. That's 1.2 percent below the level of a year ago.

For its part, the American Petroleum Institute pegged the week's decline at 1.7 million barrels, yielding total inventories of 199.1 million barrels.

At the retail level Friday, average U.S. retail prices for regular unleaded gasoline fell for a second day, down 0.4 cent at $1.724 per gallon. On Wednesday, prices were just 0.7 cent shy of the all-time high of $1.737 hit last August, according to AAA's Daily Fuel Gauge Report.

And, raising the possibility of more available feedstock for refineries, the Energy Department reported Wednesday that crude inventories for last week rose by 3.7 million barrels to a total of 279.5 million barrels, or 2.9 percent above the year-ago level. See full story.

Natural gas down on session, up on week

In other Nymex trading, natural-gas futures fell, with traders predicting that supply declines would become smaller in the weeks to come.

April natural gas fell by 4.7 cents to close at $5.596 per million British thermal units. The contract is up 15.3 cents for the week.

Early Thursday, the Energy Department said U.S. natural-gas stocks fell by 28 billion cubic feet for the week ended March 5 -- generally in line with most market estimates.

Looking ahead to next week's data, energy-forecasting firm Enercast Inc. expects a fall of only 4 billion cubic feet in natural-gas stocks for the week ended March 12.

As of the week ended March 5, total stocks stood at 1.143 trillion cubic feet, the government's data showed. While this was 407 billion cubic feet from the year-ago level, gas in storage remains some 103 billion cubic feet below the five-year average for inventories.

Meanwhile, oil-service and other energy-related stock indexes were mainly higher, as reflected by the Philadelphia Oil Service Index
OSX, -2.71%See Energy Stocks.

Gold futures on Nymex fell Friday to end $6 an ounce below last week's close, with investor interest dulled by a strong dollar and a rebound in the stock market. See Metals Stocks.

And the Reuters/CRB index, a broad-based measure of commodity futures markets, was down 0.5 percent at 274.1.

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